Case Study: Independent Directors in Chile

All over the world, the role of independent directors is gaining ground: in terms of not only the letter but the spirit of regulation. Under Chilean corporate governance law, directorships of listed companies must be renewed or replaced every three years. The country’s six Pension Funds companies, grouped into the Asociación AFP Chile, are no exception.

It is the task of these Pension Funds companies to nominate Independent Directors for the 19 listed organizations in which they have invested. Amongst them are Chile’s top 10 in terms of market capitalization: leading energy providers Endesa and Enersis, CMPC, specialists in forestry, pulp, paper and tissue, multinational retailer Cencosud, and Copec, Chile’s foremost privately-owned industrial group.

Unsurprisingly, the nominating and hiring process is subject to a stringent set of conditions. First, it must be conducted by a reputable external executive search firm. Second, the pension fund organizations can only choose from the candidates presented by that firm, and have no option to put forward their own names.

Under the Spotlight

The process is also subject to keen public scrutiny. The heat was particularly intense in 2015, according to Pulso, a leading business newspaper, reporting that the role of the directors chosen to protect pension funds would be more critical than ever, given ten troublesome years of cartels operating in a range of industrial sectors, from pharmaceuticals and shipping, to animal feed and tissue paper.

For the executive search firm to which this annual process is entrusted, the stakes are correspondingly high. “This is probably the most important mandate in this area in Chile,” says Max Vicuña, Managing Partner of Amrop MV Consulting in Santiago. “It gets a lot of exposure. There is considerable interest from various sectors of the economy regarding the results.”

At the close of 2015, Amrop in Chile was assigned the mandate, joining a prestigious stable of global and local executive firms who had conducted the process in the past. Taking the lead was Max Vicuña, himself no stranger to the Financial Services sector, having previously served as Chairman for Superintendencia de Valores y Seguros (the Chilean Securities and Insurance Supervisor Body). Mr Vicuña subsequently acted as representative of Prudential Securities in Chile.

When it came to the profile of the candidates, 2015 heralded a particularly stringent set of demands. First of all, an increasing number of disqualifying factors had to be taken into account, compounded by the need to define a sharp profile for each of the 19 companies, each one reconciling the candidates’ multiple conflicts of interest, and preserving complete impartiality from start to finish.

256 Candidates, 19 Positions

Secondly, there was a need to introduce new faces and raise the bar for gender diversity. As Max Vicuña told newspaper El Mercurio: “67% of the candidates had not previously been selected by the AFP. In addition, 19% were women; a significantly higher number compared to the current 6% of female directors in the IPSA*.”

The difficulty of finding new profiles is set to increase year on year, says Mr Vicuña. “It’s a gradual process, where many candidates have to be disclosed and the AFP have to dare a little more. On the other hand, the desire to have new names should not mean neglecting directors who have demonstrated outstanding performance and who should continue to make a major contribution to businesses. But the AFP is showing interest in this gradual process of change.”

Despite the strict laws regarding the individual responsibilities of a board position, the interest of the 256 people identified by Amrop was striking: “almost every relevant figure was enthusiastic and willing to participate in the process.”

From this high profile talent pool, 155 candidates were personally interviewed in depth at Amrop’s offices in Santiago. Next, Amrop presented 58 finalists for the 19 positions, all of which were filled.

Tough Love For Some, a Bright Future Overall

However, the pill proved difficult to swallow for some top ranking executives who were not ultimately selected. “One person in particular was so frustrated at not being considered for the short list due to conflicts of interest that they threatened us with legal action.” Fortunately the situation was quickly diffused.

Beginning in December 2015, the entire search process lasted five months, concluding after the annual shareholder meetings of each company in late April.

“Both the Pension Funds companies and the Association described the intervention as extremely successful, emphasizing Amrop Chile’s contribution both in terms of new names and the irreproachable way in which the process was conducted. The reception from the business and financial press, the economic sector, and the market in general, has been equally encouraging,” says Max Vicuña.

Amrop already has the next round of hires in its sights, aiming for a higher proportion of women, and continuing the quest for new names. Added to the ever-present challenge of identifying and defining disqualifying factors and the need to keep a firm grip on the process, the complexity is only set to increase.

Max Vicuña is confident. For directors looking to be on the radar for independent directorships of these high profile organizations, he has two recommendations. First, take a more active role in corporate governance activities, and second, be open to taking on the challenges presented by family or unlisted companies.

*The Indice de Precio Selectivo de Acciones (IPSA) is a stock market index composed of the 40 stocks with the highest average annual trading volume in the Santiago Stock Exchange (Bolsa de Comercio de Santiago).